Hecht Commodity Report

Follow us on

  • Gold moves towards the eight-year high
  • Crude oil almost fills the gap from March
  • Weakness in natural gas
  • The dollar index continues to slip- Bitcoin edges higher
  • Weakness in most agricultural commodities continues- Industrial commodities steady

 

A note to start:

I have been dealing with some challenging prostate problems over the past weeks. Many of you may have noticed that I have not been publishing articles on Seeking Alpha. I will continue to provide all reports to subscribers while I work to address my chronic BPH condition. Please feel free to email me with any questions or concerns. I am thankful for all of my loyal subscribers and will be back to full capacity in the future.

 

Next week, the report will come out on Tuesday, the final session of June and the second quarter. I will be posting quarterly reports in over the first two weeks of July. There will be no weekly report on July 8 because of the quarterlies. I will return on July 15 with a report that captures the price action from June 30 through July 8. Again, feel free to email me with any questions or comments.

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report June 23, 2020

 

Stocks and Bonds

After the recent bout of stock market volatility, markets calmed over the past week. Gains and losses were limited to under 1% in two of the three of the leading indices. The NASDAQ continues to move to higher record highs. Fears over new outbreaks and hotspots of Coronavirus continue to plague markets, but there are no plans to shut down business activity. The upcoming US election could add volatility to equities over the coming weeks and months as it will determine the future of US tax, regulatory, energy, and other policy items for 2021 and beyond. We are now officially in the summer season, which can be a quiet time in the stock market, but 2020 is anything but an ordinary year.

 

The S&P 500 rose by 0.57% since last week. The NASDAQ was 2.23% higher, and the DJIA posted a 0.14% gain. The Fed will continue to add liquidity to markets to stabilize conditions. With the short-term Fed Funds rate at zero percent through 2022, stocks will continue to receive support. We could see a shift of asset placement from the US stock market to foreign markets in Europe and the emerging markets over the coming weeks and months. I favor European and other foreign issues compared to US stocks after the recent recovery. At the same time, the Fed’s purchases of corporate bonds will continue to support the stock market with liquidity. The giant put option under the government and corporate bond market is likely to remain in place for the foreseeable future. Meanwhile, with each new injection of liquidity or purchase of debt securities, the Fed’s balance sheet will grow. The eventual price tag will be enormous for the global pandemic in the US and abroad.

 

Chinese stocks moved higher over the past week despite trade concerns.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.89 level on Wednesday, as it rose by 1.92% since the previous report. The Chinese large-cap ETF product has been trading around the $40 per share level. Support is at the March low at $33.10 with resistance at $41.65, the June high before the most recent correction. FXI has made higher lows and higher highs since March. A continuation of the bullish pattern could depend on the virus and US-Chinese relations over the coming weeks and months.

September US 30-Year bonds moved higher over the past week with some pressure on stocks. Interest rates in the US are not moving appreciably higher any time soon. On Tuesday, June 23, the September long bond futures contract was at the 176-30 level, 0.39% higher than on June 17. Short-term support for the long bond is at 170-30 with resistance at 178-14. The action in the bond market reflects Fed policy.

Open interest in the E-Mini S&P 500 futures contracts fell by 33.78% since June 16. Open interest in the long bond futures rose 2.13% over the past week. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. I have been writing, “I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.” I have traded from the long side over the past weeks. The volatility index was at 31.37 on June 23, down 6.55% on the week.

I continue to trade related products like VIXX, and VIXY are short-term trading tools. The most recent high in the VIX was at 44.44 on June 15. I will continue to buy VIXY or VIXX on dips when the volatility index falls. These are short-term trading instruments, so I use very tight stops and re-enter on the long side at lower levels after the markets trigger stops. I have let profits run but stopped losses quickly.

For the coming weeks and months, I prefer European and emerging market stocks to US equities. While US stocks could continue to edge higher in the low interest rate environment, they have come a long way from the March lows. Political uncertainty in the US with the upcoming election could make foreign markets more attractive for investors at this time. Emerging markets with exposures to commodities and inflation-sensitive assets could provide opportunities for outperformance when compared to the US stock market.

 

The dollar and digital currencies

The dollar index continued to move lower over the past week. The September dollar index future contract was at 96.608 on June 23, down 0.55% from the level on June 17. The dollar has been experiencing selling pressure since March. Open interest in the dollar index futures contract moved 6.66% higher since June 16 after an over 41% drop last week. As June dollar index futures rolled to September, many market participants exited risk positions. A move below the 94.61 level would threaten the long-term uptrend in the dollar index. Daily historical volatility in the dollar index was at 7.05% on Tuesday. The metric that measures price variance on the September contract rose to a high of 22.70% in late March.

The September euro currency was 0.70% higher against the dollar. The interest rate differential between the dollar and the euro has narrowed, which provides some support for the euro. Open interest in the euro futures rose by 1.15%. The September pound moved 0.14% lower against the dollar since last week, and open interest moved 3.00% higher. The dollar is not out of the woods on the downside, but governments around the globe tend to intervene in the foreign exchange markets to achieve stability.

 

Bitcoin and the digital currency asset class moved higher over the past week. Bitcoin was trading at the $9,652.24 level as of June 23.  Bitcoin failed after several attempts to conquer the $10,000 level. The leading digital currency rose 2.59% since last week. Ethereum posted a 6.22% gain since June 17. Ethereum was at $244.62 per token on Wednesday. The market cap of the entire asset class moved 3.26% higher over the past week. Bitcoin underperformed the whole asset class since the previous report. The number of tokens increased by 24 to 5609 tokens since June 17. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today.

On Wednesday, the market cap was around $275.051 billion. Open interest in the CME Bitcoin futures rose 6.00% since last week. Open interest has been increasing when Bitcoin moved higher and lower during downside moves, which is a bullish sign for the cryptocurrency. The next level on the upside stands at the recent high of $10,565. The trend is your friend in Bitcoin, and it remains higher. Support is at $8,930.

The Canadian dollar moved 0.17% higher since June 17. Open interest in C$ futures fell by 17.64% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 0.67% higher since last week. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. I would be cautious with any positions on the long or short side of the A$ given the potential for volatility in the current conditions. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets is similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long-term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy. I am bullish on the two currencies that I view as proxies for commodities prices.

Over the past week, the Brazilian real moved 2.43% higher against the US dollar on the September futures contract. The debt default by neighboring Argentina had little impact on the Brazilian real as it bounced against the US dollar. The real moved to a high of $0.2053 level against the US dollar on the September contract before turning lower last week. The September Brazilian currency was trading at the $0.194250 level after falling to a new and lower low at $0.16780 on May 13. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions and the spread of the virus could also cause price volatility in the agricultural products. Brazil has seen a significant increase in the number of infections and fatalities because of coronavirus, which could harm the value of its currency. However, in the long run, I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and even the Brazilian real. Nothing changed much since last week in the currency arena.

Precious metals moved higher over the past week with gold leading the way on the upside.

 

Precious Metals

As of the settlement prices on June 23, all four of the precious metals that trade on the COMEX and NYMEX exchanges posted gains. Rhodium declined since the previous report.

Gold was 2.63% higher over the past week. The yellow metal remains within striking distance of the high and level of technical resistance at $1789 per ounce. Silver rose 1.58% since June 17. August gold futures were at $1781.20 per ounce level on Wednesday. July silver settled at $18.055 per ounce on June 23. I maintain a bullish opinion on the gold and silver markets as the odds favor that the price action that followed the 2008 global financial crisis is a blueprint for the coming months and years.  Stimulus is bullish fuel for gold and silver as increases in the money supply weigh on the value of fiat currencies. Price corrections continue to be buying opportunities in the silver and gold markets. However, we could see wide price variance given the price levels. I continue to hold a long core position in gold and silver. I am also running short-term long positions looking to buy on dips with the hope of taking profits on rallies. On the short-term risk positions, I am using both the metals and the diversified gold and silver mining ETF products. Nothing has changed since last week.

While I am bullish on the gold and silver markets, they rarely move in a straight line. Using corrections as buying opportunities is likely to be the optimal approach to trading and investing.

Technical resistance for August gold stands at $1789.00 per ounce, the high from mid-April. Support is at $1671.70, the recent low. In silver, support is at $17.015, with resistance at $18.95 on the July contract. If the price action from 2008 through 2011 is a guide, gold will head for the $2000 to $3000 per ounce level over the coming months, and silver should follow the yellow metal to the upside.

Gold mining shares moved higher with the yellow metal over the past week, with the GDX up 7.67% and GDXJ moving 9.14% higher. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. The market action gave way to an outperformance by the mining shares on a percentage basis. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 7.74% and 7.90% higher since June 17. The price action outperformed the silver futures market.

Gold outperformed silver over the past week. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. The ratio had been moving steadily lower over the past weeks. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.

July platinum rose 0.98% since the previous report.  Platinum had been a laggard in the precious metals sector in 2020. July futures fell to the $846.40 per ounce level on June 23. The level of technical resistance is at $943 on the July futures contract, the recent high. Support in platinum is at $792.40 per ounce on the nearby futures contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $7,000 per ounce on June 23, down $300 or 4.11% over the past week. September Palladium rose by 1.33% since last week. Support is at $1832.20 on the September contract with resistance at $2060.30. September palladium settled at the $1951.10 per ounce level on Wednesday. The critical short-term support and resistance levels in gold and silver did not move over the past week as prices remained in consolidation mode.

Open interest in the gold futures market moved 6.81% higher over the past week. The decline over the past weeks in open interest is because of problems with dealers when it comes to the EFP, or arbitrage positions between gold for delivery on COMEX and London. The metric moved 5.25% lower in platinum. The total number of open long and short positions increased by 3.35% in the palladium futures market. Silver open interest rose by 4.18% over the period.

The silver-gold ratio moved higher over the past week.

Source: CQG

The daily chart of the price of August gold divided by July silver futures shows that the ratio was at 98.60 on Wednesday, up 0.61 from the level on June 17. The ratio traded to over the 124:5 level on the high on March 18. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.

Central banks continue to purchase gold, and net buying by central banks is a supportive factor for the price of the yellow metal.

Platinum was 0.98% higher, and palladium moved 1.33% to the upside over the past week. September Palladium was trading at a premium over July platinum with the differential at the $1104.70 per ounce level on Wednesday, which widened since the last report. July platinum was trading at a $934.80 discount to August gold at the settlement prices on June 17, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, fell $300 on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium remained at $2000 per ounce, $1,000 narrower than in previous weeks. The spread remains at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.

I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $846.40 per ounce, a contract on NYMEX has a value of $42,320, after falling to the lowest level just under two decades in March.

The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor gold, silver, and platinum on price weakness. I hold a long core position and a trading position where I buy dips and take profits on rallies. Since mining shares tend to be more volatile, I have used the mining ETFs and ETNs in gold and silver shares for short-term trading purposes. Precious metals continue to display price strength.

 

Energy Commodities

WTI and Brent crude oil futures moved higher since last week, and gasoline and heating oil climbed to the upside. Gasoline outperformed NYMEX futures, but heating oil lagged, sending the crack spreads in opposite directions. July futures in WTI and oil products rolled to August. Natural gas edged lower, but ethanol posted a gain since June 17. Coal for delivery in Rotterdam moved higher since last week. WTI and Brent futures were above $40 per barrel on June 23.

July NYMEX crude oil futures rolled to August and rose 6.29% since June 17 as the market continues to move towards filling the gap on the daily chart. The August contract settled at $40.37 per barrel on June 23 after trading to a low of $17.27 on April 28 and a high at $41.63 on the August futures contract on June 23. Production cuts by OPEC and the decline in US output contributed to the recent recovery from the lowest prices in history for WTI crude oil futures in late April. However, crude oil inventories rose for the week ending on June 12, according to both the API and EIA, product stockpiles were mostly higher during the first week of June. Crude oil inventories moved higher again for the week ending on June 19, according to the API.

Chinese demand for crude oil has been robust over the past weeks. With parts of the economy reopening in Europe and the US, the demand side of the equation has improved. However, news of new outbreaks and hotspots continue to pose a threat to the recovery in the energy commodity. The current target on the upside in August NYMEX futures is the top end of the gap at $42.17 per barrel from March 6.

August Brent futures underperformed June NYMEX WTI futures, as they rose 4.74% higher since June 17. August gasoline was 6.37% higher, and the processing spread in August was 6.92% higher since last week. The August gasoline crack spread was at $14.21 per barrel. Wild swings in energy prices caused wide price ranges in the crack spreads the reflect refining margins. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US, but 2020 is no ordinary year.

August heating oil futures moved 1.72% higher from the last report. The heating oil crack spread was 11.89% lower since June 17. Heating oil is a proxy for other distillates such as jet and diesel fuels. The August distillate crack spread recently traded to a low of $8.47 and closed on Tuesday at $10.67 per barrel. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products over the past weeks. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products. The crack spreads could be a significant indicator of demand over the coming days and weeks as the wheels of the US economy have begun moving. However, the energy market remains highly sensitive to new outbreaks and hotspots in the US and worldwide.

Technical resistance in the August NYMEX crude oil futures contract is at $42.17 per barrel level with support at the $34.66 level. The measure of daily historical volatility was at 46.9% on June 23, lower than the 50.4% level on June 17. The price variance metric was at almost 135% in early May on August futures. Demand remains the overwhelming critical factor when it comes to the price direction of the energy commodity. As I wrote over the past weeks, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.” The new active month NYMEX crude oil futures contract made a higher low at $34.66 on June 15 and has been drifting higher.

The Middle East remains a potential flashpoint for the crude oil market. Relations between the US and Iran and Saudi Arabia and Iran have not improved over the past months. While the leadership in Teheran has had their hands full with coronavirus, we could see them lash out at US interests in the region over the coming weeks or months. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. At just over $40 per barrel for the Brent benchmark, any actions that impact production, refining, or logistical routes could cause a far greater percentage move in the price of oil than we witnessed at the beginning of 2020. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks. The August Brent futures contract will roll to September at the end of June.

Crude oil open interest decreased by 3.36% over the period. NYMEX crude oil rose by 6.29%, and the energy shares underperformed the energy commodity since June 17. The XLE dropped 1.01% for the week as of June 23.

I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods. Nothing has changed since last week when it comes to opportunities for oil-related equities.

The spread between Brent and WTI crude oil futures in August was steady at the $2.26 per barrel level for Brent, which was down 23.0 cents from the level on June 17. The August spread moved to a high of $4.41 on April 30. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April. The decline in the Brent-WTI could reflect the decline in US output and the anticipation of rising demand for gasoline.

A decline in US production over the coming months could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively. While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic over the coming weeks and months.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. Oil traders have filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated. The cash and carry trade put upward pressure on freight and storage rates. The forward curve in crude oil highlights the current state of the widest contango in years. The US is filling its strategic petroleum reserve to the brim at the current low price levels. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher over the recent weeks, contango declined.

Over the past week, August 2021, minus August 2020, moved from a contango of $2.11 to $1.35, which was 76 cents lower on the week after trading to a low of $0.84 on June 18. In early January, the spread traded to a backwardation of $5.05, $6.40 per barrel tighter than the level on June 23. The spread hit a high of $10.19 per barrel on April 28. August futures traded to a low of $20.28 on April 22. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could have triggered some profit-taking, which opened up more capacity on the storage front.  Falling production also caused the spread to tighten. We could see an unwind of the spreads continue as they have gravitated back towards flat as production declines and inventories begin to fall over the coming months, which would result in significant profits for well-capitalized crude oil traders. The decline in contango since late April was a supportive sign for the price of oil. The number of rigs operating in the US continued to decline significantly over the past week, and production has been moving lower in response to the lowest price levels in years and demand problems over the past months.

US daily production fell to 10.50 million barrels per day of output as of June 12, according to the Energy Information Administration. The level of production fell 600,000 barrels from the previous week. The EIA will report data for the week ending on June 19 on Thursday, June 24. As of June 12, the API reported an increase of 3.857 million barrels of crude oil stockpiles, and the EIA said they rose by 1.20 million barrels for the same week. The API reported a build of 4.267 million barrels of gasoline stocks and said distillate inventories rose by 919,000 barrels as of June 12. The EIA reported a decline in gasoline stocks of 1.70 million barrels and a decrease in distillates of 1.40 million barrels. Rig counts, as published by Baker Hughes, fell by ten for the week ending on June 19, which is 600 below the level operating last year at this time. The decline in the rig count has been significant and should lead to falling output in the US. The number of rigs operating stood at 189 as of June 19. The inventory data from both the API and EIA was mostly bearish. However, the drop in output in the US is a supportive factor. As of June 12, US production dropped by 2.6 million barrels per day since March.

OIH and VLO shares moved in opposite directions since June 17. OIH fell by 1.29%, while VLO moved 0.53% to the upside over the past week. As I wrote last week, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $129.14 per share level on Wednesday. I am holding a small position in OIH. We are long two units of VLO at an average of $70.04 per share. VLO was trading at $62.65 per share on Tuesday.

The July natural gas contract settled at $1.637 on June 23, which was 0.06% lower than on June 17. The July futures contract traded to a high of $2.364 on May 5, where it failed miserably. Support in July stands at $1.597, the most recent low on the July contract, and at $1.519 per MMBtu the low from late March and early April on the continuous contract. Short-term resistance remains at the $1.864 level, the high from June 5.

Last Thursday, the EIA reported an increase in natural gas stockpiles.

Source: EIA

The EIA reported an injection of 85 bcf, bringing the total inventories to 2.892 tcf as of June 12. Stocks were 33.3% above last year’s level and 16.9% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report a 97 bcf injection into storage for the week ending on June 19. The EIA will release its next report on Thursday, June 25, 2020.  Over the past twelve weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 33.3% last week could provide some fundamental support to the natural gas market. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. Baker Hughes reported that a total of 75 natural gas rigs were operating in the US as of June 19, compared to 177 last year at this time. Meanwhile, the price action over the past few weeks continued to be a sign of fragile demand. I suggest tight stops on any risk positions but continue to prefer the long side over the coming week.

Open interest rose by 0.39% in natural gas over the past week. Short-term technical resistance is at $1.864 per MMBtu level on the July futures contract with support now at $1.597 per MMBtu, lower than last week. Price momentum and relative strength on the daily chart were in oversold conditions as of Wednesday.

August ethanol prices moved 1.90% higher over the past week. Open interest in the thinly traded ethanol futures market moved 14.82% lower over the past week. With only 92 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product fell 0.36% compared to its price on June 17. The price of July coal futures in Rotterdam rose 6.28% over the past week.

On Tuesday, June 23, the API reported a 1.749 million barrel increase in crude oil inventories for the week ending on June 19. Gasoline stocks fell by 3.856 million barrels, while distillate stockpiles decreased 2.605 million barrels over the period. On Wednesday, the EIA will report inventory data and daily production of the week ending on June 19. The API report was mixed for the price of the energy commodities as crude rose and products declined. Demand remains the significant factor for the price direction of crude oil.

Meanwhile, the output is declining fast with the number of operating rigs plunging and the daily production data from the EIA trending lower. I expect volatility in the crude oil market as it will move higher or lower on optimism or pessimism on the back of the progress of the virus and progress on treatments and a vaccine. The latest reports of new outbreaks were bearish for the energy sector. Production is falling, but demand remains the most significant factor when it comes to the price direction. The price recovery is threatening to close the gap just above the recent high, which is a powerful magnet for price action.

In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for July 2020 delivery.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the settlement prices on June 23, at $1.637 in July was 0.10 cents per MMBtu lower than on June 17.

The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we are in the 2020 injection season. Natural gas stockpiles started the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the lead-up to the winter of 2020/2021. However, production is likely grinding lower because of the low level of prices that make output uneconomic. The trend in stocks since March 20 compared to last year is a sign of declining output. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction is a critical factor. Meanwhile, the differential between nearby July futures and natural gas for delivery in January was $1.225 per MMBtu or 74.8% higher than the nearby price, reflecting both seasonality and substantial inventory levels.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.

We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real but has made a comeback. At $8.75 per share, PBR was 2.82% higher than on June 17. I have a small position that I will hold as a long-term investment. PBR had been weak on the back of the falling value of the Brazilian currency.

Demand will drive the price of crude oil and all energy commodities over the coming weeks and months. Falling production is supportive, but global requirements will be the primary factor when it comes to the path of least resistance of the prices of oil and oil products. Natural gas remains at a low level, limiting the downside with the price below the $1.65 per MMBtu level. Expect lots of price volatility in the energy sector, which is following the stock market or vice versa. Nothing much changed since the previous report.

 

Grains 

After the market digested the June WASDE report, soybean prices edged marginally higher, but CBOT wheat and corn futures declined.

July soybean futures edged 0.43% higher over the past week and was at $8.7500 per bushel on June 23. The rising tensions with the Chinese are weighing on soybean prices, but the weather is the leading factor for the price of the oilseed over the coming weeks. We are now in the height of the summer growing season. Open interest in the soybean futures market moved 1.22% lower since last week. Price momentum and relative strength indicators were rising towards overbought territory on Wednesday. The rally has been slow and steady. Soybean futures continued to move away from the bottom end of the recent trading range. The move above the $8.62 level was a technical break to the upside, but the oilseed futures are not running away on the upside.

The July synthetic soybean crush spread fell 6.25 cents from the level on June 17 to 64.75 cents, which continues to be a warning sign for the oilseed futures.

I had been writing, “I believe that a relief rally is possible in the soybean futures and would only position from the long side of the market at under $8.50 per bushel.” US relations with China could throw cold water on the chances of higher price levels as we are now in the summer season. I suggest tight stops on long risk positions and would be looking to take profits on rallies. I will tighten risk parameters the further we move into the growing season, which risks tailing off to minimal levels during the peak summer months when crops become established in August. The best chances for a supply-based rally will come during the coming weeks when the plants are most vulnerable. My guidance is unchanged from last week. The soybean futures market has been so quiet that something is bound to wake it from its slumber. The move above the $8.70 level has been a constructive sign. However, the price action in the crush spread is not bullish. While the prospects for trade between the US and China are bearish, a period of dry weather conditions could cause a short-covering rally. The weather is the most significant factor over the coming weeks.

July corn was trading at $3.2500 per bushel on June 23, which was 1.59% lower on the week. Open interest in the corn futures market rose by 1.61% since June 16. Technical metrics were below neutral readings in the corn futures market on the daily chart as of Wednesday. Support on nearby corn futures is at the $3.09 level, on the continuous contract, $3 per bushel is a line in the sand on the downside. Long positions should have stops below $3 per bushel. Technical resistance remained at $3.3475, after the move above the $3.30 level.

Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.  The price of August ethanol futures rose by 1.90% since the previous report. August ethanol futures were at $1.2350 per gallon on June 23. The spread between August gasoline and August ethanol futures was at 6.33 cents per gallon on June 23, with gasoline at a premium to ethanol. The spread moved 5.48 cents since last week as gasoline outperformed the biofuel in August futures, which are now the active month in the energy complex.  The prospects for corn prices are a function of both the weather and the price of gasoline and crude oil. Corn found support from the energy sector over the past weeks, which lifted the price to its highest level since April 14. Over the past week, energy rose, and ethanol rose, but corn futures declined.

July CBOT wheat futures fell 0.56% since last week. The July futures were trading $4.8600 level on June 23. Open interest increased by 3.18% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures stand at $4.7600 and $5.2900 per bushel. Price momentum and relative strength were at an oversold condition on Wednesday on the daily chart but were turning higher.

As of Wednesday, the KCBT-CBOT spread in July was trading at a 51.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 5.25 cents since June 17. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. The spread moved towards the long-term average over the past week, which could provide some support for the price of the grain if the spread continues to narrow.

I will continue to hold long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks. The further we move into the growing season without any significant price appreciation, I will work to cut position sizes. The time of the year when crops are most vulnerable to the weather is between now and July. As crops mature, they can withstand periods of adverse conditions. I continue to favor the long side but will be looking at the calendar as a time stop on positions is likely to be the optimal approach to controlling risk. Grains have been disappointing, but we are only at the beginning of the growing season, and uncertainty over the 2020 crop will remain at an elevated level over the coming weeks.

July futures are now rolling to the next active months, which reflect new crop prices.

 

Copper, Metals, and Minerals

Industrial commodities prices were mixed since last week. Optimism over the global economy, the rebound in the stock market, higher energy prices, and the reopening of markets all are supportive of base metals. Iron ore and uranium slipped, but the Baltic Dry Index and lumber posted significant gains since June 17.

Copper rose 2.67% on COMEX over the past week. The red metal was 1.01% higher on the LME since the last report. Open interest in the COMEX futures market moved 4.47% higher since June 16. July copper was trading at $2.6585 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME inventories fell, and COMEX stockpiles moved higher.

Long-term technical support for the copper market is at the early 2016 low of $1.9355 per pound. From a short-term perspective, the first level on the downside stands at $2.5310 per pound on July futures, and then the $2.2895 and $2.0595 levels. Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months. Then rising tensions over coronavirus, Hong Kong, and trade could cause volatility in the sector. Keep in mind that during the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008. By 2011, the copper price rose to a new all-time high at just under $4.65 per pound. A massive level of stimulus is supportive of the price of copper and other commodities. Technical resistance is now at $2.7000 per pound, the June 10 high. The markets are not yet out of the woods when it comes to coronavirus. Any outbreaks that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply. Therefore, caution is advisable in copper, which can become extremely volatile during risk-off periods. We could see volatility increase as tensions between the US and China rise. The $2.70 level turned out to be formidable resistance.

The LME lead price moved lower by 0.11% since June 16. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but Coronavirus had weighed on the price of lead because of falling fuel prices. Since late April, the prices of crude oil, gasoline, and lead moved higher. Lead was strong over the past weeks. The price of nickel moved 2.17% lower over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin fell 0.70% since the previous report despite a rise in inventories. Aluminum was 0.31% lower since the last report. The price of zinc posted a 2.40% gain since June 16. Zinc was at the $2067.00 per ton level on June 16. Nonferrous metals remained within their respective trading ranges.

July lumber futures were at the $433.70 level, 15.13% higher since the previous report. Interest rates in the US influence the price of lumber. Lumber can be a leading economic indicator, at times. The price of uranium for July delivery fell 0.46% after recent gains and was at $32.85 per pound. The world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19, which helped to lift the price over the past months. The volatile Baltic Dry Index rose 47.82% since June 17 to the 1558 level after an over 45% rise last week. June iron ore futures were 1.55% lower compared to the price on June 17. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market fell by 0.63% since the previous report.

LME copper inventories moved 6.07% lower to 233,400 as of June 22. COMEX copper stocks rose by 2.40% from June 16 to 76,446 tons. Lead stockpiles on the LME were 1.09% lower as of June 22, while aluminum stocks were 0.08% higher. Aluminum stocks rose to the 1,617,825-ton level on June 22. Zinc stocks decreased by 0.94% since June 16, after a significant gain last week. Tin inventories fell by 8.52% since June 16 to 3,005 tons after a significant rise last week. Nickel inventories were 0.05% higher compared to the level on June 16.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 29 cents on June 23, down 25.0 cents since the previous report. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $8.00 per share and moved 14.71% lower since last week.

FXC was trading at $11.08 on Wednesday, 38 cents higher since the previous report. I continue to maintain a small long position in FCX shares. FCX moves higher and lower with the price of copper.

I remain cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause a return of risk-off conditions to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. Very little changed in this sector since last week.

We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $24.96 on June 23, up 0.52% for the week. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a buy and a long-term hold. I would add to the long position on price weakness over the coming weeks and months if another risk-off period occurs. Base metals and industrial commodities prices could continue to follow crude oil and stocks over the coming week.  The price action in the sector was constructive over the past week.

 

Animal Proteins

Live and feeder cattle in August futures were on either side of unchanged over the past week. Lean hog futures in August declined from the level on June 17. Bottlenecks in the supply chain continue to cause low prices for producers and high prices and limited availabilities for consumers.

August live cattle futures were at 97.200 cents per pound level up 0.36% from June 17. Technical resistance is at $1.0190 per pound. Technical support stands at 93.575 cents per pound level. Price momentum and relative strength indicators were above neutral readings on Wednesday. Open interest in the live cattle futures market moved 0.66% higher since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket continued to be a dislocation in the market.

August feeder cattle futures slightly underperformed live cattle as they fell by 0.28% since last week. August feeder cattle futures were trading at the $1.33200 per pound level with support at $1.28325 and resistance at $1.38450 per pound level. Open interest in feeder cattle futures rose by 5.39% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were just above neutral territory on Wednesday. Cattle futures markets were quiet over the past week.

Lean hog futures moved lower since the previous report. The August lean hogs were at 52.500 cents on June 23, which was 1.27% lower than last week’s level. Price momentum and the relative strength index were below neutral readings on June 23 on the August contract and heading for oversold territory. Support is at 50.425 cents with technical resistance on the August futures contract at the 58.025 cents per pound level. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers.

The forward curve in live cattle is in contango from June 2020 until April 2021. There is a backwardation between April 2021 and August 2021, when contango returns until October 2021. The Feeder cattle forward curve is in contango from August through November 2020 before it flattens until May 2021. The forward curves did not move over the past week.

In the lean hog futures arena, after contango from July through August 2020, there is backwardation from August 2020 until October 2020. Contango exists from October 2020 through July 2021. There is a backwardation from July through December 2021. Futures prices reflect the potential for shortages for consumers. Some supermarkets continue to limit beef, pork, and chicken purchases to prevent hoarding.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the August futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.

 Source: CQG

Based on settlement prices, the spread was at 1.85140:1 compared to 1.82130:1 in the previous report. The spread rose by 3.01 cents as live cattle fell more than lean hog futures in August over the past week. The spread fell to a low of 1.2241 in mid-March, which was below the long-term average making pork more expensive than beef. The spread moved over the average and kept going, and beef is more expensive compared to pork on a historical basis on the August futures contracts.

The current low prices could give way to far higher levels in 2021 as producers adjust to the new price environment. After processing plants resume regular schedules in the eventual aftermath of the virus, shortages could develop. I believe that today’s low price levels will cause prices to rise next year, and consumers will face even higher levels at the supermarket. I am a buyer of cattle and hogs on price weakness and would only trade the beef and pork futures market from the long side over the coming weeks. Nothing changed from the previous report.

 

Soft Commodities

Three of the five soft commodities moved lower over the past week; cocoa and coffee futures moved higher. Futures have rolled to their next active month on the Intercontinental Exchange. Sugar futures were the worst performer, followed by FCOJ and cotton on the downside.

October sugar futures fell by 2.77% since June 17, with the price settling at 11.92 on June 23. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on October futures is at 12.40 cents with support at 11.71 cents on active month futures. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market.

The value of the September Brazilian real against the US dollar was at the $0.194250 against the US dollar on Wednesday, 2.43% higher over the period. The September real traded to a new low of $0.16780 on May 13. The Brazilian currency had been making lower lows as Coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Argentina’s recent default on debt obligations did not put downward pressure on the Brazilian real. Meanwhile, Brazil has become a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Over the past week, we have seen price weakness in all three of those soft commodities.

Price momentum and relative strength on the daily sugar chart were on either side of neutral territory as of June 23. The metrics on the monthly chart were below a neutral reading, as was the quarterly chart. Sugar made a new high above its 2019 peak in February before correcting to the downside. The low at 9.05 was the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world. The price action in sugar over the past weeks reflects the recovery in crude oil and gasoline prices as ethanol moved higher. A stronger real has also provided some support for the sweet commodity. Meanwhile, the lockdowns have weighed on demand, which could eventually cause production to decline.

In February, risk-off conditions stopped the rally dead in its tracks on the upside. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 1.39% higher since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures in late 2019 and early 2020. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Over the past week, the price remained close to the 12 cents per pound level.

September coffee futures moved 0.05% to the upside since June 17. September futures were trading at the 98.20 cents per pound level. The technical level on the downside is at 94.55 cents on the September futures contract. Below there, support is at around 92.20 and 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance is at $1.0240 on the active month contract. Coffee put in a bullish reversal on Monday, June 22. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. The lower coffee falls, the higher the odds of a significant rebound become. Our stop on the long position in JO is at $27.99. JO was trading at $30.29 on Wednesday. Open interest in the coffee futures market was 1.89% lower since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March. I have added to my long position over the past week. From a technical perspective, a bottom above 92.20 cents would be constructive. Coffee could make a similar move to sugar give the recent strength in the Brazilian currency.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The price of coffee has remained firm despite the risk-off conditions. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength turned higher from oversold territory on Tuesday and were trending higher. On the monthly chart, the price action was below neutral and falling towards an oversold condition. The quarterly picture was also below a neutral condition. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined profit objectives. Coffee remains near the bottom end of its pricing cycle. I would leave wide scales on buying as picking a bottom in the volatile coffee market is more than a challenge.

The price of cocoa futures moved higher over the past week on the now active month September contract. On Wednesday, September cocoa futures were at the $2290 per ton level, 2.69% higher than on June 17. Open interest rose by 0.68% over the past week. Relative strength and price momentum were below neutral readings on June 24, near oversold territory but have turned higher. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. Cocoa has been falling since early June. We are long the NIB ETN product. NIB closed at $27.38 on Wednesday, June 17. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2475, $2509, and at the mid-March high of $2631 per ton on the July contract on the daily chart. On the downside, technical support now stands at $2208 and $2183 per ton. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets. Nothing has changed since last week. I continue to view the price action in the cocoa futures market as a buying opportunity.

December cotton futures declined by 0.93% over the past week. The recent declines had been on the back of continued concerns about the Chinese and global economies. The increase in tensions between the US and China is not supportive of the price of cotton. However, the weather conditions across growing regions will determine the price direction over the coming weeks and months.  December cotton was trading at 59.44 cents on June 23, after falling to the lowest price since 2009 in early April. On the downside, support is at 57.75, 52.15 cents, and then at 48.35 cents per pound. Resistance stands at the 61.14 cents per pound level. Open interest in the cotton futures market fell by 5.03% since June 16. Daily price momentum and relative strength metrics remained just above neutral territory on Wednesday. The June WASDE report was not bullish for cotton from a fundamental perspective as global inventories have grown to the highest level in five years. However, I remain very cautiously optimistic about the prospects for the price of cotton at above the 50 cents per pound level but would use tight stops on any long positions and a reward-risk ratio of at least 2:1. Cotton is inexpensive, but the fundamentals remain problematic. The China-US issues remain a bearish factor for the price of the fiber, but the price level remains at a low level. The move above 60 cents for the first time since March was constructive for the fiber futures, but it failed. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Cotton has made higher lows and higher highs since early April. The price needs to remain above the 56.43 level on December futures to keep that pattern intact.

July FCOJ futures rolled to September and experienced a decline since the last report. On Wednesday, the price of September futures was trading around $1.2255 per pound, 1.05% below the price on June 17. Support is at the $1.18150 level. Technical resistance is at $1.3200 per pound. Open interest fell by 7.09% since June 16. The Brazilian currency could eventually turn out to be bullish for the FCOJ futures, and bottlenecks at the ports could create volatility. FCOJ broke out to the upside over recent weeks, but the price failed over the past week as FCOJ futures fell to the lowest level since mid-May. OJ took the stairs higher and is currently on an elevator ride to the downside. Last week I wrote, “The price ran out of steam on the upside above the $1.30 level.” After trading to a peak at $1.32, the price action has been mostly bearish, but OJ stabilized over the past week.

I am looking for stability and rebounds in the soft commodities now that July futures have rolled to the next active month in all of the agricultural products. Buying on weakness and taking profits on rallies could be the optimal approach to the highly volatile sector. From a long-term perspective, I remain bullish on all of the members of the soft commodities sector and view price dips as buying opportunities in the futures or related ETF products.

 

A final note

Despite the surge in the number of coronavirus cases in the US and abroad, the stock market continues to shrug off the potential for shutdowns and is choosing optimism over pessimism. Gold was working its way towards an eight-year high, and crude oil futures at above $40 per barrel on the August NYMEX contract were edging towards filling the gap on the charts. July copper at $2.65 per pound was nearing its most recent peak at $2.70. The weakness in the dollar index is supportive of commodities prices, as is the highly accommodative monetary policies from the US Fed and other global central banks. I continue to believe that 2020 is likely to be a lot like 2008 with a secular rally in commodity prices over the coming months and years. Unprecedented levels of liquidity that are far greater than in 2008 come with a price tag, which could be inflation. I favor the commodities sector from the long side on all price weakness over the coming weeks and months. I will return with the next weekly report on Tuesday, June 30.

 

As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report in the coming months. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Please keep safe and healthy in this environment.

 

 

 

Until next week,

 

Andy Hecht

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.   

 

 

 

 

 

 

Andy Hecht

Author

Real News. Real Profits.

Trade Alerts – Podcasts – Webinars – Online Courses